What is Forex Currency Trading?
Trading of foreign currencies happens on the biggest international market in the world called the foreign exchange market; daily average volume exceeds 2.1 trillion. Trader in the forex market buy and sell curreny pairs with the hope the currency pair will move in their favor allowing them to profit. Economic and world events are the main catalysts that propel the forex market.
Forex Basics:
The foreign exchange currency market is not limited to a physical location like stock markets are. As a matter of fact, the forex market is much larger than all stock markets combined. The internet and telephone are the main mediums of transmission for forex trading. The great majority of forex trading takes places in major cities in the countries of the U.S., England, Australia, Japan, and Germany.
The term for the first currency in a currency pair is base currency, the term for the second currency in a currency pair is quote currency, counter currency, or terms currency. Exchange rates in forex are quoted per unit of base currency, for example, the exchange rate between the U.S. dollar and the euro will be indentified as EUR/USD, so the number will be the amount of U.S. dollars that can be traded for one euro.
At the present time the currency with base precedence is the euro, so this means that all currency pairs involving euro should have it as the base currency. The hierarchy for base currency is as follows: Euro, Pound Sterling, Australian Dollar, New Zeeland Dollar, United States Dollar, Canadian Dollar, Swiss Franc, and Japanese Yen.
How Forex trading works:
In the foreign exchange currency market quotes include a bid and an ask price. Bid is the term used for the price to sell the base currency in exchange of the counter currency. The ask is the price to buy the base currency in exchange of the counter currency. The spread is the term used to describe the difference between the bid and ask price. Forex brokers are market-makers; this essentially means they provide a market for currency traders to interact. Forex brokers do not charge a commission like stock brokers do, instead they are compensated by taking the spread of the currency pair being traded.
Pip is the term used to discuss currency pair movement. A one pip movement is the smallest incremental change of any given currency pair. For example, if you see the current price of GBP/USD (British pound/U.S. dollar) quoted as 1.6832(bid)/1.6837(ask), then the spread of this currency pair is 5 pips, because the difference between the two is .0005. So for the GBP/USD currency pair one pip; the smallest incremental change for that pair would be equal to .0001.
Forex trading can be quite volatile due to the multitude of big money players that trade this market. Volatility in forex acts like a double edged sword; depending on how you utilize it, it will help you or kill you in the markets. Make sure you understand the many intricacies of price action before jumping into the market head first.
